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Defense official to industry: Deliver quality or ‘make reduced or no profits’

A key Pentagon official stressed the importance of a “robust” U.S. defense sector, but he also delivered some tough love to private firms.

As their annual budgets shrink, Pentagon officials must “adapt” their decisionmaking to ensure its manufacturing sector remains strong, and they even plan to “tailor” investments to protect some “niche firms,” Brett Lambert, deputy assistant secretary of Defense for manufacturing and industrial base policy, told a House Armed Services subcommittee.

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But Lambert also warned that some tactics used by defense firms to increase their own margins “must end,” and sternly told firms the Pentagon will not keep dying industries alive or reward bad business models.

“In the high-budget environments of the past, many companies have grown to expect high margins independent of the quality of their performance,” Lambert said. “As budgets shrink, this practice must end.”

Lambert, who for several years has been at the forefront of the Pentagon’s efforts to bolster and better understand the industrial base, also had tough words for firms that fail to perform.

“Individual companies that do not provide the government with quality products that meet the department’s requirements on time and at reasonable cost should expect to make reduced or no profits,” he said.

His comments come as annual defense budgets, which almost doubled in the decade after 9/11, are being reduced. Many in the defense sector and on Capitol Hill see this funding shrinkage as a potentially fatal blow to an industrial base that already was eroding due to consolidations, an aging workforce and few weapon programs in the pipeline to attract new skilled workers.

As the Pentagon last year was crafting new buying guidelines, some industry officials privately speculated that DOD officials were targeting companies’ profits.

DOD officials moved quickly to allay such fears, and Lambert struck a similar tone Tuesday.

“The Department of Defense ... appreciates that businesses must be motivated by the opportunity to make a reasonable profit,” he told the Armed Services special subcommittee on Defense Business Challenges. “Indeed, leveraging the inherent motivations to allow companies that perform well to increase profit levels above a mean is in the department’s interest.”

But while Pentagon officials will make some decisions to maintain the world’s strongest military manufacturing sector, they expect that some firms will experience turbulence, or fold.

“Our commitment to working with industry, however, does not mean the Department of Defense should underwrite sunset industries or prop up poor business models,” Lambert said.

The Obama administration last year crafted new guidelines for the services and industry, spelling out how it will buy everything from combat hardware to support services. That was part of a broader effort aimed at gaining a better understanding of America’s defense sector.

Lambert told the subcommittee that the Pentagon has made “an aggressive effort to map and assess the industrial base sector by sector, tier by tier.”

“Just as doctors do not seek to understand the functioning of every individual neuron in the central nervous system, the department does not seek to know the exact details and reasoning behind every supplier relationship,” Lambert said. “But we do need to better understand the industrial base’s nervous system, circulatory system and bone structure.”

That detailed work will be used at various levels of the Defense Department to make budget and program decisions.